Optimal insurance design of ambiguous risks

Christian Gollier ()

No 12-303, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.

JEL-codes: D81 G22 (search for similar items in EconPapers)
Date: 2012-05, Revised 2013-01
New Economics Papers: this item is included in nep-ias, nep-mic and nep-upt
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal insurance design of ambiguous risks (2014)
Working Paper: Optimal insurance design of ambiguous risks (2013)
Working Paper: Optimal insurance design of ambiguous risks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:25815

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